Annually, GAAP Dynamics publishes an eBook detailing the results of our analysis of the PCAOB inspection reports. (Click here to learn more about this year’s eBook in this blog post!) Our analysis of the 2017 PCAOB inspection reports reflected a combined deficiency rate of 30% for annually inspected firms! I’ll explain below which firms were in the analysis, how these results compare to prior years and the top issues noted in the reports.
How did we get our hands on this information?
More than 1,850 public accounting firms, both in the U.S. and abroad, are registered with the Public Company Accounting Oversight Board (PCAOB). If an accounting firm audits a publicly traded company or securities broker-dealer registered with the SEC, it is subject to regular PCAOB inspections. These inspection reports are made public and can be obtained directly from the PCAOB’s website. To perform our analysis, we simply downloaded the reports and started reading!
Which firms were included in the analysis?
The vast majority of these accounting firms are inspected at least once every three years — so called “triennially inspected firms.” However, if an accounting firm audits more than 100 public companies or registered broker-dealers, it is subject to annual PCAOB inspections. Our analysis focused on the annually inspected firms.
How did these firms fare in the most recent inspections?
Like I mentioned above, based on the 2017 inspection reports, the annually inspected firms had a combined audit deficiency rate of 30%. Of the 279 audits inspected, 85 audits had at least one audit deficiency noted by PCAOB inspectors. The audit deficiency rate for individual firms varied widely, from a low of 13% to a high of 73%! That’s quite the range!
How does this audit deficiency rate compare with prior years’ inspection results?
At 30%, the audit deficiency rate is down considerably from rates noted in prior years. Kudos to the profession! But of course, audit quality can always be improved – and that’s what we should be striving to do!
1. As of the date of publication, one 2017 inspection report was not yet available for an annually inspected firm.
What were the auditing standards noted most frequently in the PCAOB inspection reports?
For each deficiency noted, the inspection report details the relevant audit standard(s). We compiled the deficiencies in the annually inspected firm reports by each audit standard.
Our analysis reflected the most deficiencies occurred with respect to:
- Auditing internal control over financial reporting – 33%,
- Assessing and responding to risks of material misstatement – 33%,
- Auditing accounting estimates – 9%,
- Auditing fair value measurements and disclosures 7%, and
- Performing audit sampling procedures – 15%
Which financial statement areas had the most issues?
The inspection reports additionally detail the financial statement account or area in which the deficiency was noted. The top 5 accounts or areas were:
- Loans and the Allowance for Loan Losses
- Investment Securities, including Derivatives and Equity Method Investments
- Inventories and Related Reserves
- Business Combinations
These results can be used by firms to focus on these areas to improve their audit quality, as these areas contributed to 73% of all audit deficiencies noted!
What else does our analysis reflect?
Our recently released eBook contains more detail on the information above and also takes a deep-dive into the top deficiency areas. For the top deficiency areas, we explain the underlying auditing standard, pull actual deficiencies straight from inspection reports to discuss what went wrong, and provide insights to prevent these deficiencies from happening in the future.
This year we’ve partnered with Adigeo Consulting LLC to incorporate viewpoints from former PCAOB inspection leaders. We also discuss the latest developments in PCAOB inspections, areas of focus for future inspections, and international inspection results. Download our eBook today for FREE to learn more!
This post is published to spread the love of GAAP and provided for informational purposes only. Although we are CPAs and have made every effort to ensure the factual accuracy of the post as of the date it was published, we are not responsible for your ultimate compliance with accounting or auditing standards and you agree not to hold us responsible for such. In addition, we take no responsibility for updating old posts, but may do so from time to time.